Will Online Retail Companies Soon Be Required to Charge a Sales Tax?

Are the days of shopping online free of sales tax coming to an end? If certain senators get their way, they could be.

In a 1992 decision, the Supreme Court held that a business must have a physical presence – a “nexus” – within a state in order for that state to require the business to collect a sales tax. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). This rule has enabled online retail companies such as Amazon.com to reap significant profits while not having to pass along a sales tax to their customers. In its decision in Quill Corp., the Court stated that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” Id. at 318.

As states search for more money in a tough economic climate, Congress is beginning to exercise the power the Court gave them. It is considering proposed legislation that would allow states to tap into this previously untouched revenue. The Main Street Fairness Act, sponsored by Sen. Dick Durbin (D – Ill.), would allow states to require online and mail-order retailers to collect state and local sales taxes.

The amount of money states could collect through such a change in the law is substantial. The National Conference of State Legislatures estimates that nationwide, the estimated total is more than $11 billion.

A number of states have already enacted laws that address this issue. In 2008, the New York Legislature passed a bill that expanded the definition of nexus to include certain online retailers, including Amazon. Under the State’s law, an online retailer has nexus in New York and must collect sales tax if their sales affiliates in the state generate more than $10,000 in annual revenue for the retailer. Amazon brought suit and alleged the law violated both the commerce and due process clauses, but the state Appellate Division determined that the New York law was constitutional. See Amazon.com, LLC v. New York State Dept. of Taxation & Fin., 2010 NY Slip Op 7823 (N.Y. App. Div. 1st Dep’t 2010). California, Illinois, Connecticut and several other states have passed similar legislation during the past few years.

From a legal perspective, it is significant to consider the implications such a law would have for companies and entrepreneurs who conduct business online. It is likely that at the very least, items such as the terms and conditions and sales total pages of such a company’s website would have to be modified to reflect such a revised law.

Small Business[MUSIC PLAYING] We enjoy representing entrepreneurs. I started this law firm over a decade ago. And the truth is that I enjoy representing entrepreneurs because I identify with them. And so, when someone comes to me and they want to start a business. They are speaking about becoming an entrepreneur, I take it really seriously. And I listen to their story. And I'm really interested in what their plan is and how it's going to work. It's just beginning. And in that state, it needs something of, I guess, tender loving care by its accountant, by its insurance agent, and by its lawyer. While we certainly represent a significant number of large multinational companies and handle their legal issues, we also have a strong core of clients who fall under the category of start-ups and small to medium size businesses. In a lot of respects, this is a very fulfilling and unique client representation. Many of these companies are not quite of a stature that they have their own in house legal department, so we really serve as their general counsel. They're calling us for their day to day legal matters, as well as the unique ones. So what that means is that we're dealing with everything from their corporate governance issues, attending board meetings, dealing with their employment contracts, intellectual property, customer contracts, and everything that really comes up in the day to day operation of their business, as well as the big deals and transactions, as well as the litigation matters that they face. Another interesting aspect to this is whether the business is a family business. Frequently, when you see an entrepreneur, what they want to do is have their family get involved in the business for two reasons. The first reason is family will usually not demand high salaries or, in the beginning, they might not demand anything. They may do it as a labor of love. And the second thing is that family can be trusted. And this all works to an extent. But there's also important legal protections that have to be put in place. Even though it's a family business, it has to be treated professionally. That means there have to be contracts. There have to be employee manuals. There has to be policies and procedures. There have to be lines of authority. And that's important, not so much because people don't trust one another, it's more because businesses run better when everyone knows what they're doing and what's expected of them. Then there are less misunderstandings, less miscommunications. And so, again, this is one of those areas where the dynamic of the situation, the understanding of the psychology, if you will, of how this business is running, and who these people are, and how they're relating to one another, is just as important as the legalities themselves. And, in an interesting way, the legalities reflect those relationships. Our firm truly welcomes entrepreneurs who wish to start a business or have started their business and wish to expand. We are very eager to have those discussions and would welcome the opportunity to advise such clients if they need us.

Nonprofit Law Info Blog

Non-Profit Law[MUSIC PLAYING] One of the areas of law that we truly enjoy is the representation of nonprofits. In other words, charities. This involves not only forming charities, determining whether the charity will be a 501(c)(3), a 501(c)(4), or with respect to a house of worship, it might not even need to be either in order to be classified as a charity, to how the company that is in a nonprofit mode can maintain that mode. In other words, just because you obtain 501(c)(3 status doesn't mean that you keep it. You have to be vigilant. You have to understand that there are ways that the nonprofit must operate which really don't apply to a for profit company. Such things, for example, as executive compensation. The executive compensation has to be in a different model than a for profit company would necessarily have to have. In addition, there are issues relating to contracts, employment disputes, landlord tenant issues, all the panoply of legal matters that would apply to a for profit or a nonprofit company. But it's always informed by the fact that these nonprofits generally are underfunded, at least in the sense that they want to spend their money doing good for the world, as opposed to dealing with their lease or their vendors. And in addition, that there's always a sense that there is a mission here. An aspect of representing nonprofit entities that often arises comes out of the complications from the fact that most of these entities are primarily, if not entirely, staffed by volunteers. This presents some unique situations. First, the volunteer may not be so inclined to sign the normal documentation that you would ask an employee to sign. Some of the things that an entity needs to have in place to secure its rights and to make sure it's protected are the same as those of any other business. But a volunteer is not going to necessarily look as kindly towards signing those documents. It also means that you may have someone who's very passionate about the mission of the organization, but is not necessarily as motivated to adhere to the governance issues, or to hear what the attorney is saying in terms of the complications that could arise. Sometimes you also have some political strife or conflict between the volunteers and the paid staff, and how to address that from both a documentation point of view, but also the realities of resolving those disputes in a way that's amicable, considering that everyone is doing this for a purpose, for a mission, and how can you get both sides to be on the same page and drive that purpose. And so all of these issues we find to be absolutely fascinating and very meaningful. As a matter of fact, many of our attorneys have served and do serve on the boards of trustees for non-profits. So, in many ways, we find this area of law to be particularly meaningful. And we enjoy doing it. And we look forward to having a practice that incorporates this important aspect of commercial law.

Franchise Law Info Blog

Franchise Law[MUSIC PLAYING] Our firm handles a number of franchise law matters. This has become something of a cottage industry recently, simply because with the economic ups and downs, more and more people want to own their own businesses. Franchises are supposed to be turnkey operations. They're supposed to be situations in which you just walk in to a thriving business where all the major decisions have already been made in terms of how it's going to look, what the product is going to be, how it's going to be distributed and manufactured, how it's going to be presented to the public. And so it seems as if it's much easier and less complex than starting from scratch. But, as with everything involving legal matters, the devil is in the details. We have found that the franchise agreements that people are asked to sign are unusually complex, and surrender a plethora of rights that normally would not be surrendered when someone is starting a business. The truth is that franchises involve renting a business, in essence, using a business model rather than owning it. The way lawyers describe that is they describe it as licensing the intellectual property that is owned by the franchisor. And in addition to that, the franchisor has an unusual amount of involvement in very basic decisions, not just the placement of marketing for the product or the way the product will be sold to the public, but also such things as the lease for the property and whether the person will locate the franchise in one area or another. We can have a wonderful opportunity to start a franchise in a particular area, and suddenly that is undermined because the franchisor puts another franchise for the same product within proximity. And all of a sudden, something that looked great now is not so great. Well, there are certainly differences between operating a franchise and operating any other type of business. There's also a lot of similarities. Any of the issues that a business owner is going to have to address in terms of employment issues, leasing commercial real estate issues, intellectual property, IT services, that's all still going to need to be addressed by a franchisee. Sometimes it might be easier because of the relationship with the franchisor. Some of the services may already be packaged for them. But that can also make it more challenging. There's going to be compliance issues with that bulky franchise agreement that they are given, as well as complication if the package that they're being provided by the franchisor is not one that is suitable to them, or things are not working, and then overcoming the challenges of that aspect. But by and large, you'll see that there are a lot of similarities. So, all of the things that we recommend for general business owners are also going to be recommended for a franchisee. Another example of that would be that, certainly, even if a property is being operated as a franchise, it still needs to have its own corporate governance structure. The owners should still form an LLC or a corporation and enable itself to take advantage of the corporate liability shield for operating the business. All contracts that that business has, including the contract with the franchisor, should be through that entity. There is something inspiring about representing people who go out there and start their own businesses, start their franchises, work hard, and try to make a go of it. And we find that these relationships with these clients can be some of the most rewarding that we have.